As much as I hate to rain on the deflation parade, I must point out that food inflation is increasing worldwide. It seems that food prices are unaware that they should be falling, because they are instead rising fast all around the world.

NEW DELHI: Costlier food items and a marginal increase in prices of decontrolled fuels pushed up inflation for the second week running even as economists stuck to their estimate of near zero inflation by the middle of 2009.

Government data showed inflation for the week ended January 17 at 5.64% against 5.6% in the previous week. The annual rate of year-on-year inflation was 4.45% in the corresponding week last year.

Russia's inflation amounted to 0.8 percent between January 20 and 26, 2009, and 2 percent for the year to date(compared to 2.2 percent for the same period of January 2008), the Federal State Statistics Service (Rosstat) reported today. In January 2008 as a whole, the inflation rate stood at 2.3 percent.

Australian retail fruit and vegetable prices rose by 8pc in the December quarter, standing out against the overall falling price trend, which has resulted in the biggest slide in consumer prices (CPI) for 11 years.Fruit and vegetables received special mention among the Australian Bureau of Statistics CPI figures for leading the few price rises, followed by takeaway food, which increased by 1.5pc.

Fruit's prominent role, especially, in leading the CPI statistics is likely to be to stir vigorous comment from many Australian fruit growers.

Stone-fruit growers recently have been claiming prices received for their fruit have fallen below cost of production.They' ve been vocal in criticising the supermarkets for not paying enough for their fruit.

Measured by the target measure CPIX, consumer price inflation came in below market expectations at 10,3% in December, down from 12,1% in November and the recent peak of 13,6% in August. Transport inflation was sharply down, at only 2% year on year, from 13,3%, because of further cuts in the petrol price, which is now almost 50% down on its July peak. Food remains a worry, though. It remained stubbornly high at nearly 17.1% in December, despite declining international grain and other commodity prices.

Consumers in Northern Ireland could find rising food bills an added challenge as the recession starts to bite over the coming months.New figures provided by comparison website mySupermarket.co.uk reveal that the cost of food is going up at more than twice the official rate of inflation. The statistics show that the price of all food and drink products has risen by 6.6% during the year to January 14.

They also show even steeper price rises for staple food items — such as bread, milk and cheese — with the cost of a basket of goods rising by 16% during the past year.

OTTAWA — Canadian consumers — tens of thousands of whom have already lost their jobs to the recession — may find this hard to swallow, but despite headlines of falling interest rates and waning inflation, their grocery bills and borrowing costs are in fact rising.

While prices fell 0.7 per cent month-to-month and the annual inflation rate to 1.2 per cent in December — projected to fall below zero this year — grocery prices were nine per cent higher than a year earlier, Statistics Canada reported Friday.

"Inflation is at a two-year low, but that's not the way it feels for those of us shopping for groceries," said CIBC World Markets economist Krishen Rangasamy. "As talk of generalized deflation is surfacing, prematurely in our view, food prices continue to trend higher, with the depreciating loonie boosting prices for fresh fruits, vegetables and other imports."

My reaction: Despite the economic crisis and widespread deflation fears, world food prices are rising. This major escalation in food prices calls to question the conventional wisdom that inflation is not a problem.

1) Rising food prices are likely to continueThere is a misguided notion that lower demand, lower commodity costs, and deflation will lead to lower prices. This is false:

A) Falling demand only lowers prices when producers have room to cut prices. If businesses have no profit margin with which to absorb lower prices, then falling demand, instead of lowering prices, lowers the supply of goods by forcing companies into bankruptcy. This is what is happening, as demonstrated by Pilgrim's Pride Corp, the No. 1 US chicken producer, which declared bankruptcy on December 1.

As companies are forced out of business because of their inability to pass on higher costs, the supply of goods is reduced and their surviving competitors have room to raise prices. This can be seen in the rising price of chicken wings in the wake of Pilgrim's Pride' s Bankruptcy

B) Companies didn' t raise prices enough in 2008 to compensate for rising manufacturing costs. While the commodity bubble was exploding, companies held back on price increases to avoid losing customers, but now they must pass on last year' s increased costs to stay in business. Kellogg, for instance, earlier this month announced plans to lift prices on three of its cereals in the "low-to-mid single digit" range to help offset increased production costs, and these price increases will likely be matched by rivaling companies.

C) Deflation fears are forcing up borrowing costs, which like commodity costs, must be passed on to consumers. While the fed might have lowered interest rates, banks aren't lending and companies face much higher financing cost. The failure to pass on higher borrowing cost will lead to more bankruptcies and less supply. Again, this reduced supply will allow surviving competitors to raise prices.

Everyone who is expecting deflation is ignoring this reality: companies can' t sell goods below their production costs and stay in business. Since the profit margins of manufacturers at home and abroad were razor thin going into this crisis, don' t expect prices to drop. Expect companies to go bankrupt.

2) Unlike last year' s artificial inflation, today' s rising prices are the real thingLast year' s inflation, especially the higher prices related to oil, was fake. When oil hit 147 dollars a barrel, it didn' t do so because of supply/demand dynamics, but because of speculator dominated futures markets in the US. Hedge funds, pension funds and, other investors piled blindly commodity indexes and ETFs while knowing nothing of the fundamentals underlying the commodities they were buying, or even WHICH commodities they were buying. This enormous influx of dumb money created an impressive bubble and resulted in artificially high inflation rates seen around the world last year.

Today' s worldwide food inflation is a far different story, because it is happening in the face of widespread deflation fears. Consumers are delaying purchases. Banks are hoarding cash (ie: most Chinese merchants aren' t accepting credit cards because banks are delaying payments).Businesses are scaling back expansions and reigning in spending.Yet, despite all these factors, food prices are going up. Isn' t that interesting?

It also begs a very interesting question: if everyone, from individuals to businesses, has scaled back their spending due to deflation fears, what happens to already rising food prices when deflation fears go away?

Rising worldwide food inflation is surprising and puzzling economists. They don' t understand why it is happening (they didn' t see the credit crisis or the bursting commodity bubble coming either). Next month, as food inflation continues to grow worse and consumers around the world start stockpiling food, these economists will really start to worry, and, in about two months time, with food inflation truly spiraling out of control, they start panicking, their deflation predictions completely forgotten.

Conclusion:The US is not immune from rising food inflation: prices for food in US grocery stores jumped 6.6% last year, the biggest spike since 1980. Even this December, which saw gasoline prices fall by 17.2% (the biggest monthly decline in 71 years), food costs refused to fall. If US food prices couldn't muster a fall in December, five months after the commodity bubble burst and deflation fears gripped the world, then they should not be expected to fall at all.

Rising worldwide food prices also have very negative implications for the dollar. Many countries that are seeing rising food inflation do possess the means to bring it under control: sell off their US reserves. Russia and India alone have over 800 billion dollars they can sell to strengthen their currencies and lower their food costs. So if food inflation keeps increasing, expect a growing quantity of treasuries to be sold by central bankers desperate to prevent starvation at home.

Finally, the rise in world food prices increases the likelihood of out of control inflation in China. Should China drop its dollar peg and start to sell its immense US reserves to fight domestic hyperinflation, the dollar will likely lose its reserve status and most of its value.

0 Responses to *****World Food Prices Are Rising Fast*****

This is getting scary...got directed to Schiff some months ago and his chilling predictions. Went on to start reading Austrian economist and now I have found this terrific blog.

We have a substantial bit of savings we plan on using to build a house. We are trying to buy the materials before the prices go through the roof but I keep having visions of a nearly finished house incomplete because of a collapse.

A small voice inside of me keeps saying to tell my wife to hold her dream for a bit while I put it all into gold.

Is it irrational to be racing to get the materials purchased and to attempt to build now...its an argument that is ongoing inside of me.

Regarding PierreLegrand's post, now is not the time to be building anything! Buy your gold. Also consider silver, it is even more heavily depressed than gold and ought to do even better as an investment.

Housing will crash. You'll be able to buy existing properties very cheaply. No need to build your own dreamhouse just yet.

every time i am in the checkout line, i get a chuckle about the deflationist argument. the only things that are deflating are asset prices that where way overblown anyway, phony wealth such as never lived in homes resold for much higher prices. in a sense just a correction.

At last a glimmer of inflation. That glimmer will turn into a glare in the not too distant future. Deflationists are the rulers of the roost now, but I think they myopically look at asset prices and credit amounts decreasing and say "ahaaa!! no inflation. Mish said inflation is here and now, but investing is about the future. Since no one can accuratly time this thing, I dont want to wake up and find out that the Chinese and Saudis no longer are buying Tbills and they no longer take dollars in trade.

This economic event is gonna be so painful. The only thing that will skyrocket is the most important things LIKE food, energy, clothing. I mean, we really will be at a subsistence level.

As for Pierre. If you have an opportunity to lock in the price of housing now with no debt, do it. The price of housing may go down, but it also may go up. Housing is a durable good, and if you can afford it, and you've run the numbers to compare it to renting, then I say buy it, just don't make the mistake most people do and think its an investment, ITS NOT! Its your home, and its hard to put a value on that (although if it makes sense to rent do it, also your debt should not exceed 3-2times you gross annual salary, I say 2-3 as opposed to 3 due to the fact that we're in a recession which calls for extra caution when aquiring debt due to potential job loss.

PierreLegrand said... This is getting scary...got directed to Schiff some months ago and his chilling predictions. Went on to start reading Austrian economist and now I have found this terrific blog.

Thanks for the complement.

Is it irrational to be racing to get the materials purchased and to attempt to build now...its an argument that is ongoing inside of me.

If you want to buy the land with a fix rate mortgage, that would be a good investment. Sounds to me, from what you are saying. that you already own the land though.

As for building the house, I sort of agree with dashxdr on this one...

You could do it if really wanted too, but it would be an enormous hassle to try to build a house in the middle of hyperinflation. Even if you had all your money in gold, it would be a nightmare to negotiate the prices of materials and labor... It would be far easier and safer to buy gold way till there is a stable paper currency again.

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Anonymous said... every time i am in the checkout line, i get a chuckle about the deflationist argument. the only things that are deflating are asset prices that where way overblown anyway, phony wealth such as never lived in homes resold for much higher prices. in a sense just a correction.

Yep.

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andy said... I thought the definition of deflation was crashing asset prices while the debt remains the same, and rising cost of living.

There is the monetary definition of deflation/(hyper)inflation, and then there is the everyday meaning of deflation/(hyper)inflation:

monetary definition: deflation is a period where money supply shrinks and (hyper)inflation is a period where money supply grows (what prices do during this period is irrelevant).

These two different meanings create a LOT of confusion, because, although falling prices and shrinking money supply usually happen together, they don't always do.

I thought deflation would still bring inflation in costs right?

Deflation would increase the debt burden by making interest payments relatively more expensive (salary going down but mortgage payment the same). However, if you had a steady stream of income and no debt, then all your costs would be going down.

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Anonymous said... At last a glimmer of inflation. That glimmer will turn into a glare in the not too distant future.

You sound very exited by the prospect of the destruction of our currency. lol

The current economical challanges could be described in my opinion as following; The financial world left reality when the dollar cut its ties with gold - food, something highly Real and the demand for it collides....The increase in world population is in fact a result of oil ( a reality in decline...).

The only way to fix the current and coming finacial difficulties is to connect the value of money to reality(food). If the gold standard gets introduced now, once again- food prices are going to peak, sparking a world shortage never seen before.

As a humanist I´m very pessemistic about the coming 50 years... The future belong to those who have the strength to think the unthinkable and withtake the proper actions.

Eric, thanks for all our hard work. I've been meaning to ask this question for days. I predicted the real estate crash and the stock market crash just by common sense, and basic high school economics. (I was two years early! lol) Now, with your expertise, I'm predicting hyperinflation. So it seems a good time to buy a nice piece of property up in the hills and start farming because won't hyperinflation wipe out mortgage debt?

BTW, a great book with a detailed financial history of WW1 and WW2, starring Montagu Norman at The Bank Of England and also starring The Federal Reserve in New York was recently published. Very detailed investigation of collusion between the two, (among other geo-political strageies) in order to impact other countries money supply, by setting interest rates. I know you would love it. "Conjuring Hitler" by Guido Giacomo Preparata. Check it out!

The surving folks are going to have to learn some of the old knowlwedge to survive. A good place for learning the old ways is http://www.snare-trap-survive.com Eating wild plants, learning to trap snare their food. But right now folks should be buying food. Stock up on canned foods like tuna fish canned soups and stews, flour, sugar, tea, coffee etc.

No where in this comment stream have I read the word community. It is a fatal flaw to imagine that we can exist independantly. Tribal society was no accident; groups of 100 to 300 people proved to be ideal for sustainable living.

Economics is like exercise: the more you mull over cause and effect, the easier it is to see what will happen if and when some seemingly unrelated event occurs.

The big bet is that the fiat currency we use will lose all its value. This will mean that it won't be able to buy much. To get control, new currency will have to be issued. To keep the cycle from repeating itself, we will need an asset-backed currency, as well as ridding ourselves of fractional reserve banking and the Fed, which have turned debt into money.

This system constantly requires more and more money being put into circulation in order to pay off creditors. The financial system then collapses when lending ends, causing economic chaos.

Money is only as valuable as the willingness of the issuer not to just print it up. Our system tries to control the politicians' tendency to overspend, which is the biggest systemic threat, although it seems outright fraud and the bad bank idea are damaging our currency's credibility even more.

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